Sasol Limited Integrated Report 2021 - Book - Page 18
Our operating context
Where we operate
Where we invest
South Africa 42%
Our ability to preserve and create value is closely connected to the macroeconomic environments of the countries in which we operate
and depends on a number of key economic drivers, our response to them as well as their impact on our stakeholders. We generate
almost half of our turnover in South Africa, followed by Europe and then North America from our asset base that is largely distributed
across these countries. The external operating context impacts our profitability, business continuity, risk management and the
decisions we make regarding our strategy. It also informs our thinking on material matters.
The rand/US$ averaged R15,40/US$, about 2% stronger than the R15,69/US$
recorded the prior year. COVID-19 and vaccine rollout related considerations,
global risk sentiment and commodity price trends were the main drivers of rand
trends and volatility.
Rest of World 5%
Rest of World 12%
The rand/US$ is likely to find near-term support from favourable global risk sentiment, positive current account trends, favourable interest rate differentials and the
limited rollout of some structural economic reforms. Sentiment swings are likely to contribute to ongoing high levels of volatility.
Average exchange rate (US$/Rand)
Source: IMF, StatsSA, SARB
We expect global demand to exceed the 2019 level in Q2 CY22 as COVID-19 restrictions have largely been removed in the United States and are easing in much of Europe.
Compared with global demand, we expect a supply shortfall for 1H FY22. However, the stock draw is expected to be small, and for this reason, we do not see further sharp
oil price increases unless OPEC+* keeps output at July 2021 levels for the rest of the year.
COVID-19 strains and weaker vaccine efficacy, a slower vaccine uptake and a faster return of OPEC+* and Iranian volumes pose a downside price risk. Conversely,
a continued demand surge as the vaccine programmes unfold, outpacing the return of production volumes, may lead to a tight market and higher prices.
Average Brent crude oil (US$/bbl)
HOW WE RESPONDED/WERE IMPACTED
Our integrated value chain continued to deliver a strong financial performance,
benefitting from the higher oil price, cost discipline and recovery in demand
due to easing of mobility restrictions. Following the recent material rise in the
oil price, we have been able to restructure put options to zero cost collars lifting
the floor from US$43,11 to US$60,09, thereby enhancing our FY22 hedging
programme, ensuring cash flow robustness and protection against future oil
price volatility. The oil hedge cover ratio for FY22 was increased by hedging an
additional 18 million barrels (4,5 million barrels per quarter) using swaps.
Vaccine rollout challenges, pre-existing structural constraints, policy inconsistencies, corruption, low confidence levels, risk of civil disobedience and strained government
finances are likely to inhibit the pace of South Africa’s economic recovery. Our current expectation is for the economic activity to recover gradually from the impact of COVID-19,
reaching pre-COVID-19 levels by late CY22/early calendar year 2023. Employment levels and per capita GDP are likely to take much longer to recover to pre-pandemic levels.
THE PAST YEAR
Rest of North
World and South Africa GDP growth (%)
In anticipation of a recovery in demand and limited supply growth, oil prices
continued to strengthen during the year, up from US$43/bbl in July 2020 to
US$73/bbl by June 2021. The average FY21 oil price was US$54,20/bbl,
5,8% higher than financial year 2020 (FY20). Demand improved due to the
economic recovery and stimulus programmes, widespread vaccination campaigns
and the easing of mobility restrictions. OPEC+* has gradually increased
production as the demand recovery became more evident, while United State’s
oil production growth was limited as oil majors pursued financial discipline and
prioritised investor returns.
United States 49%
The global outlook has improved, but further COVID-19-waves and variants, and the pace of vaccine rollouts still threaten the global recovery. It is expected that monetary
and fiscal stimulus, rising consumer and business confidence, and better employment prospects are likely to support the global growth recovery in the latter half of
calendar year 2021 (CY21) and into calendar year 2022 (CY22). World GDP was expected to have reached pre-COVID-19 levels by mid CY21 but recovery remains uneven
across regions and countries. For example, China has already more than fully recovered, while the United States is close to pre-COVID-19 levels. In contrast, the Euro area,
the United Kingdom and South Africa are expected to lag in recovery.
HOW WE RESPONDED/WERE IMPACTED
We were able to mitigate the negative macroeconomic effects using the levers
of our Response Plan and Sasol 2.0 transformation programme ie containing
costs, prioritisation of capital, improvement of profit, redesigning our operating
model and workforce transitioning, coupled with strategy-led asset disposals and
the close management of liquidity as well as covenant and financial market risk
management. We hedged US$2,80 billion of exchange rate exposure for financial
year 2022 (FY22) at a weighted average collar of rand/US$14,54 to 17,52.
We continue to execute our mandated FY22 exchange rate programme.
Rest of Africa 6%
United States 16%
THE PAST YEAR
The global economy contracted by about 3,3% year-on-year as COVID-19-related
impacts battered economies. South Africa’s economy contracted by 7%, the
worst contraction since Reserve Bank records began in 1946. Real per capita
GDP essentially recorded its sixth year of decline. As the South African economy
reopened following strict lockdowns, growth prospects improved. However,
despite three consecutive quarters of growth, economic activity in the first
quarter was still 3,2% below pre-pandemic levels.
South Africa 33%
Rest of Africa 4%
The FY22 hedging programme has been fully executed at a gross weighted
average level of US$63,16/ bbl using a combination of zero cost collars (at a collar
range of US$60,09/bbl to US$71,97/bbl) and swaps (at an average strike level
The updated hedging levels enhances the strengthening of the balance sheet
and the reduction of the Company’s absolute debt levels. The restructuring
was focused on FY22 only.
* Organisation of the Petroleum Exporting Countries, OPEC+ includes Russia.
Sasol Integrated Report 2021